The Rural Patriot

August 1, 2006

The House Raises the Federal Minimum Wage, but at What Cost? (Part 2)

Filed under: Congressional Votes,Randy Kuhl — theruralpatriot @ 9:16 pm

Randy Kuhl was one of two sponsors for a provision relating to hedge funds and pension plans for the recently passed HR 5970.

Sell-out: Why hedge funds will destroy the world

Hedge funds are private investment funds, primarily organised as limited partnerships – in essence, betting syndicates for the very rich.

If hedge funds were a country, it would be the eighth-biggest on the planet. They can sink whole economies, and have the potential to crash the entire global financial system. Yet they are beyond regulation. We should be very afraid.

…the hedge-fund industry – lords of havoc who, a consensus is building, have the potential to be responsible for the next great crash. … The key features of these funds are that they trade in eye-watering risk and they are barely regulated. The two are related. Because they answer to nobody but themselves, hedge funds have side-stepped regulation and can do as they like.

This does not sound like something that I would want the bulk of my pension money ivested in.  I am not a big risk-taker – I don’t have the luxury of being able to gamble with my family’s pension fund.

Pension officials who have been shaken by market downturns and persistent deficits are attracted by hedge funds’ promise of richer, or more consistent, returns. But the trend has caused some consultants and academics to voice cautions. They question whether hedge funds, with risks that are hard to measure, are appropriate for pension funds, whose sole purpose, by law, is to pay out predetermined benefits to retired workers.

Hedge fund investors place a lot of trust in the funds’ managers, giving them great flexibility in how they produce returns. The managers do not need to give investors specifics about trading activities, and there are no daily updates on the value of investors’ holdings as there are with mutual funds.

I like accountability; how about you?

“Hedge funds are not, should not be, and will not be unregulated,” SEC Chairman Christopher Cox said in testimony to a Senate Banking Committee hearing. Cox also said he’s recommending the SEC issue a new anti-fraud rule covering hedge funds.

Meanwhile, Cox said he’s going to recommend that the SEC move to limit the marketing and availability of hedge funds to “unsophisticated retail investors.”   “They are generally risky ventures that simply don’t make sense for most retail investors,” he said.

Mr. Cox is more than likely speaking about the majority of us here.

A short provision in the massive bill allows hedge funds, the lightly regulated investment pools, to do away with a ceiling on how much money they can take from pension plans. They’ve traditionally limited the amount of pension-fund money they’ll take to 25% of their total assets.

(This, actually, is great news to the Wall Street crowd.  Hedge funds would be able to manage more of your pension money.)

The reason: Going above that ceiling generally requires a hedge fund to become a fiduciary — that is, a party with specific legal obligations toward workers and retirees — under the Employee Retirement Income Security Act, or Erisa, the federal law that sets standards for most private pension plans. That triggers broader scrutiny and limits the flexibility and fees of hedge-fund managers.

But the change is opposed by a coalition of unions and the association of state securities regulators, which say it could risk workers’ pensions. Hedge funds aren’t subject to the same disclosure or other regulatory requirements as other common pension-fund investments, such as stock and bonds of publicly traded companies or mutual funds. They also tend to be more risky and volatile — though sometimes also more profitable.

The North American Securities Administrators Association, representing state regulators, said earlier this year, “Hedge funds lack the transparency and liquidity of publicly registered mutual funds or publicly traded stocks.”

AFL-CIO Associate General Counsel Damon Silvers called the provision “a very bad idea” for labor union members.

Maybe if you are extremely wealthy and can afford high-risk ventures, hedge funds are for you.  If you aren’t, then hedge funds should probably be a limited part of your investments, especially when it comes to your pension fund.

Mr. Kuhl, would you please explain to us why you felt that this provision was essential to pension reform?  It seems to me that this has the potential to do harm instead of good for the working people of this country.

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5 Comments »

  1. It’s ironic that Randy Kuhl claimed to go to Iraq to perform his essential “oversight” duties, yet time and again he doesn’t think anyone will be watching what he’s doing at home. He lost the Social Security privatization PR battle and now he pulls another fast one – letting Wall Street get its hands on more of our money.

    A quick check of Kuhl’s FEC filings reveals (shocker!) that he’s accepted over $10,000 from mutual funds, markets and the Securities Industry Association. (I used to work for these guys and their glamorous sponsored trips for Congressional staff to the financial markets in NYC are still one of the must-dos.) By the way, Mr. Kuhl, how many big hedge funds do we have in Olean or Hornell?

    Most public companies still aren’t clear what hedge funds really are and whether its good to surrender significant equity positions to them.

    Publicly-traded companies must balance disclosure requirements with the risks of revealing trade secrets in their businesses, and so should hedge funds agree many outside of Wall Street and the bought-and-paid-for Republican Administration. But this is a story that is still unfolding. The true risks may not be revealed, unfortunately, until yet another scandal rocks the industry. In the meantime, it is difficult for even public companies to separate the wheat from the chaff when it comes to hedge funds and to figure out what if anything they should be doing to protect their other investors.

    The SEC was formed after the great crash “to level the playing field and protect all investors. But now, more than 70 years later, market observers are worried that the secret moneymaker du jour…could cause history to repeat itself,” according to a Baltimore Sun article. In the absence of self-regulation, which “hedge funds haven’t coalesced around,” a level playing field through government regulation is the best hedge against such short term memory loss.

    But Kuhl seems to have already forgotten or is confident that we have.

    Comment by alexandria — August 4, 2006 @ 1:26 am | Reply

  2. Thank you, alexandria, for your commment. You provide valuable information regarding this topic.

    The hedge fund provision has received very little attention in the media. I hope more will become aware of this and its implications.

    The senate voted down the House bill last evening, but it will not be any surprise to see this issue rear its head again.

    Again, I would like to hear Mr. Kuhl’s justification for including this provision on pension reform.

    Comment by theruralpatriot — August 4, 2006 @ 1:54 pm | Reply

  3. Well done! what a refreshing insight…

    Comment by Online Stock Trading — September 26, 2006 @ 3:23 pm | Reply

  4. Thanks for the info, I appreciate it.

    Comment by Mr skin — September 27, 2006 @ 1:58 am | Reply

  5. makes you think doesn’t it

    Comment by bob — February 22, 2007 @ 2:42 am | Reply


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